You pay tax on interest from both checking accounts and CDs, but the amount depends on how much you earn

The IRS taxes interest income. If your checking account or CD earns interest, that interest is taxable income in the year you receive it. The tax you owe depends on your total income for the year and your tax bracket — not on the account type itself.

Your bank will send you a Form 1099-INT if you earned $10 or more in interest during the tax year. You report this amount on your tax return. If you earned less than $10, the bank may not send a form, but you still owe tax on the interest if you have other income that pushes you into a taxable bracket.

CDs typically earn more interest than checking accounts, so you are more likely to cross the $10 reporting threshold with a CD. But the tax treatment is identical: interest is interest, regardless of which account holds it.

Key Takeaways

  • Interest earned in checking accounts and CDs is taxable income reported on your federal tax return.
  • Your bank sends Form 1099-INT if you earned $10 or more in interest during the year.
  • The tax rate on interest depends on your total income and tax bracket, not on the account type.
  • CDs earn more interest than checking accounts, so you are more likely to owe tax on CD interest.
  • Interest is taxed in the year you receive it, even if the CD has not yet matured.

How the IRS treats interest income from each account type

A checking account that pays interest works the same way as a savings account from a tax perspective. The bank calculates interest monthly or daily, deposits it into your account, and reports it to the IRS. You owe federal income tax on that interest at your ordinary income tax rate.

A CD works differently in timing but not in tax treatment. When you buy a CD, you lock in a rate for a set period — three months, one year, five years, or longer. The interest accrues (builds up) over that time. Some CDs pay interest monthly or quarterly; others pay it all at maturity. Either way, the IRS taxes the interest in the year you receive it or the year it is credited to your account, whichever comes first.

This matters for long-term CDs. If you buy a five-year CD that pays all interest at maturity, you do not wait five years to pay tax. You owe tax on the interest each year as it accrues, even though you have not touched the money yet. This is called accrued interest, and the bank reports it on Form 1099-INT each year.

When you receive a 1099-INT and what it means

Your bank issues Form 1099-INT by January 31 of the year after you earned the interest. You receive a copy, and the bank sends a copy to the IRS. The form shows the total interest you earned from that bank during the previous calendar year.

If you have accounts at multiple banks, you will receive a separate 1099-INT from each one. Add all the interest amounts together when you file your tax return. If you earned $50 in interest from a checking account at Bank A and $200 from a CD at Bank B, you report $250 total on your return.

The 1099-INT does not calculate your tax or tell you what to pay. It is straightforward a record of income. You use it to fill out your tax return, and your tax bracket determines how much you owe on that income.

How much tax you actually owe on interest income

Interest is taxed as ordinary income, meaning it is added to your wages, self-employment income, and other earnings. Your total income determines your tax bracket, and that bracket determines your rate.

For 2024, federal tax brackets range from 10% to 37% depending on your filing status and total income. If you earn $50,000 in wages and $500 in interest, your interest is taxed at the same rate as your last dollar of wages — not at a special rate.

You may also owe state income tax on interest, depending on where you live. Some states do not tax income at all; others tax it at rates up to 13%. Your state tax return will ask for the same interest income you reported to the IRS.

If your interest income is very small and your total income is below the threshold for your filing status, you may not owe any federal tax at all. A single person with no other income owes no federal tax on the first $14,600 of income in 2024 (this amount changes yearly). Interest counts toward that threshold.

The difference between interest and principal on a CD

When you buy a CD, you put in a principal amount — say, $5,000. The bank pays you interest on top of that. You owe tax only on the interest, not on the principal. The principal is your own money; you are not earning income by getting it back.

This is straightforward if the CD matures and you withdraw it. You get your $5,000 back plus interest. You owe tax on the interest only. But if you withdraw the CD early, you may face a penalty — a fee the bank deducts from your interest or principal. The penalty itself is not tax-deductible, but it does reduce the amount of interest you actually receive, which lowers your taxable income.

Tax-advantaged accounts that avoid interest tax

Regular checking accounts and CDs are taxable. But some accounts let you earn interest without paying tax on it, at least up to a limit.

A Roth IRA or Roth 401(k) lets you earn interest tax-free if you follow the withdrawal rules. You can hold a CD inside a Roth IRA, and the interest is not taxed. A traditional IRA or 401(k) defers tax — you do not pay tax on interest while the money is in the account, but you pay tax on withdrawals later.

A 529 education savings plan also grows tax-free if you use the money for may have access to education expenses. Interest earned in a 529 is not taxed as long as you withdraw it for tuition, fees, books, or room and board at an accredited school.

These accounts have contribution limits and withdrawal rules. They are not right for everyone, but they are worth considering if you are saving for retirement or education and want to avoid tax on interest.

Reporting interest on your tax return

You report interest income on Schedule B (Interest and Ordinary Dividends) if you earned more than $1,500 in interest and dividends combined. If you earned $1,500 or less, you can report the total directly on Form 1040 without using Schedule B.

Attach your 1099-INT forms to your return or keep them with your records. The IRS receives a copy from your bank, so the numbers must match. If you lose a 1099-INT, contact your bank and ask for a replacement.

If you earned interest but did not receive a 1099-INT (because it was under $10 or the bank made a mistake), you still report it. Write the amount on your return and note that it is from interest income.

Frequently Asked Questions

Do I owe tax on interest if I do not withdraw the CD?

Yes. If the CD accrues interest each year, you owe tax on that interest in the year it accrues, even if you leave the money in the CD and do not touch it. The bank reports the accrued interest on Form 1099-INT, and you owe tax on it whether you withdraw it or not.

What if my interest income is very small?

If your total income is below the threshold for your filing status, you may not owe federal tax. For 2024, a single person with no other income owes no tax on the first $14,600. Interest counts toward that threshold. Check the IRS website for your filing status and year to see if you must file.

Can I deduct CD penalties from my taxes?

No. If you withdraw a CD early and pay a penalty, you cannot deduct the penalty on your tax return. The penalty reduces your net interest, which lowers your taxable income, but you cannot claim it as a separate deduction.

Is interest from a checking account taxed differently than interest from a CD?

No. Both are taxed as ordinary income at your tax bracket rate. The only difference is the amount of interest — CDs typically pay more, so you are more likely to owe tax on CD interest. But the tax treatment is identical.

Do I need to report interest if I did not get a 1099-INT?

Yes, if you earned interest. Banks issue 1099-INT only for $10 or more, but you owe tax on any interest income. If you earned less than $10 and did not receive a form, report the interest on your return anyway.